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Economy exceeds expectations in August
In August,
economic activity increased 4.5% over the same month last year, according
to the global indicator for economic activity (IGAE, Indicador Global
de la Actividad Económica). The actual reading was well above
expectations, which had the economy growing at an annual 3.5% pace and was
also above the 2.0% annual growth rate recorded in July. The robust
performance in agriculture, which expanded 14.6% over August last year,
was in part responsible for the surprisingly strong August reading.
Agriculture expanded for the second consecutive month at a double-digit
pace continuing the rebound from a very weak June reading. The services
sector, which is more important due to its share of gross domestic product
(GPD), added 5.2% over the same month last year, well above the 2.8% July
expansion. A month-on-month comparison, confirms the strong August
reading. According to seasonally adjusted data, the economy expanded
0.76% over the preceding month, following on a 2.01% expansion in July.
Consequently, the downward trend that was observed during the prior three
months was interrupted. In August, the annual average growth rate
stabilized at 3.5%.
Industrial sector recovers but developments
in the manufacturing industry remain concern
However, the
trend in the all-important industrial sector continues to point downward.
In August, industrial production expanded 2.1% over the same month last
year. While the August reading reversed an annual 1.3% contraction in
July, the rebound was insufficient to stem the downward trend observed in
the past months. In August, the annual average growth rate of the
industrial sector inched downwards another 0.2 percentage points from 2.3%
in July to 2.1%, the fourth consecutive decline. The improvement in
August industrial output was concentrated in mining and manufacturing,
whereas construction as well as electricity, gas and water decelerated
over July. Nevertheless, Consensus Forecast panellists believe that the
industrial sector will gather speed towards the end of the year and see
full-year growth at 2.4% in 2005, accelerating moderately to a 3.0% pace
next year.
Unemployment
declines and leading
indicators and consumer confidence augur well for continued recovery
With economic
growth in August well above expectations and positive economic
developments in the past month, the steady downward revisions for economic
growth this year should come to a halt. In September, unemployment
dropped from 4.1% in August to 3.7%. However, a number of uncertainties
related to a new methodology introduced by the National Statistical
Institute (INEGI) earlier this year and a host of supplementary employment
indicators elaborated from different data sets continue to point to
different directions, rendering unemployment unreliable as an indicator of
economic activity. However, consumer confidence and leading indicators
also point upwards. The leading and coincident indicators for August,
published on 4 November, both improved over the previous month. The
coincident indicator that tracks the current developments in the economy
was up 1.06 percentage points over the preceding month in seasonally
adjusted terms, following on a 0.09% increase in July. The leading
indicator that tries to anticipate future developments in the economy
increased 0.16% over the preceding month. Moreover, consumer confidence,
which had dropped in August, recovered for the second consecutive month.
In October, the consumer confidence index rose 2.0 percentage points to
reach 103.3 points, as all five sub-categories that comprise the overall
index improved over the previous month. Mexican consumers are especially
upbeat about future prospects as perceptions over the households’ future
economic state and the country’s economic future experienced the strongest
increase compared to the previous month. Moreover, confidence towards
purchasing consumer durables increased by 2.1 percentage points over last
month, which should help support domestic consumption in the months
ahead. Consensus Forecast participants have ended a series of downward
revisions to this year’s economic growth forecast and have maintained last
month’s 3.2% projection for 2005. Consensus Forecast panellists see the
diminished growth momentum from this year providing a less solid backdrop
for next year and expect GDP growth in 2006 to remain limited at 3.4%.
Inflation drops to historic low in October
In October,
consumer prices increased 0.25%. The actual rate was well below the 0.40%
increase registered in September and also fell short of the 0.38% expected
in last month’s Consensus Forecast. Housing experienced the strongest
price rise in October, mitigated by lower food, beverages and tobacco
prices. As a result of the subdued development in consumer prices
observed in October, annual headline inflation dropped from 3.5% in
September to 3.1%, the lowest rate since the Central Bank started
reporting inflation in 1969. The core inflation index, which excludes
more volatile categories such as oil and fresh fruits and vegetables,
increased by 0.27% and annual core inflation dropped by 0.1 percentage
points over September to 3.1%. Thus, inflation is now just a notch above
the Central Bank’s 3.0% central target rate. Consensus Forecast
panellists have not yet fully factored in the latest developments since
October inflation was reported on 9 November. Therefore, the current 3.6%
forecast for year-end inflation is likely to experience a notable
adjustment next month. However, at the current juncture, a broad range of
year-end inflation is possible. If consumer prices were to increase at the
same 0.25% pace as in October, inflation would end the year at 2.5%. On
the other hand, if consumer prices would experience a similar 0.85% spike
as registered in November last year, year-end inflation would reach 3.7%.
For next year, Consensus Forecast panellists expect inflation to pick up
again, ending 2006 at 3.7%.
Central Bank cuts interest rate for third
consecutive month
Banco de
México
has taken the more benign inflationary environment into account and has
continued to reverse a string of consecutive monetary policy tightening.
On 28 October, the Central Bank reduced the benchmark lending rate for the
third consecutive month. In a statement, the Central Bank said that
monetary conditions would be allowed to ease no more than 25 basis points.
The move effectively reduced the overnight lending rate to 9.00% from
9.25%. On the past three occasions the Central Bank has made use of the
new policy tool that consists of announcing a desirable level of interest
rates instead of adjusting the traditional policy tool, the so-called
corto or “short”, which was left unchanged at 79 million pesos.
The corto, which officially remains a policy tool, indirectly
influences interest rates by lowering or increasing the amount the Central
Bank lends overnight to the banking system. Moreover, monetary
authorities are likely to continue to loosen monetary policy. The new
system appears to be working effectively. The benchmark 28-day Cetes
rate dropped from 9.02% on 29 September to 8.80 on 3 November, the lowest
rate since January this year. Consensus Forecast panellists expect the
benchmark interest rate to drop to 8.9% by the end of the year, which is
unchanged over last month’s forecast. |
